 8. Marginal Costs in Relation to Values—General Principles This chapter and the three following are given to a study of the marginal cost of products in relation to the values of those products on the one hand, and on the other hand to the values of the land, machinery, and other appliances used in making them. The study relates to normal conditions and long period results. This fact must ever be borne in mind. The market value of anything may be much above or much below the normal cost of production, and the marginal costs of a particular producer at any time may stand in no close relation to marginal costs under normal conditions. It was indicated at the end of Chapter 6 that no one part of the problem can be isolated from the rest. There are comparatively few things the demand for which is not greatly affected by the demand for other things to the usefulness of which they contribute, and it may even be said that the demand for the majority of articles of commerce is not direct, but is derived from the demand for those commodities to the making of which they contribute, as materials or as implements. And again this demand, because it is so derived, is largely dependent on the supply of other things which will work with them in making those commodities. And again the supply of anything available for use in making any commodity is apt to be greatly influenced by the demand for that thing derived from its uses in making other commodities and so on. These interrelations can be and must be ignored in rapid and popular discussions on the business affairs of the world. But no study that makes any claim to thoroughness can escape from a close investigation of them. This requires many things to be borne in mind at the same time, and for that reason economics can never become a simple science. The contribution which this group of chapters aims at making covers little ground, but that ground is difficult, and we shall need to work over it carefully and from more than one point of view, for it is thickly strewn with pitfalls and stumbling blocks. It deals primarily with the earnings of land, machinery, and other material agents of production. Its main argument applies to the earnings of human beings, but they are influenced by some causes which do not affect the earnings of material agents of production, and the matter in hand is sufficiently difficult without further complicating it by side issues. Let us begin by recalling the action of the principle of substitution. In the modern world nearly all the means of production pass through the hands of employers and other businessmen who specialize themselves in organizing the economic forces of the population. Each of them chooses in every case those factors of production which seem best for his purpose, and the sum of the prices which he pays for those factors which he uses is, as a rule, less than the sum of the prices which he would have to pay for any other set of factors which could be substituted for them. For whenever it appears that this is not the case, he will, as a rule, set to work to substitute the less expensive arrangement or process. This statement is in close harmony with such common sayings of everyday life, as that everything tends to find its own level, that most men earn just about what they are worth, that if any one man can earn twice as much as another, that shows his work is worth twice as much, that machinery will displace manual labor whenever it can do the work cheaper. The principle does not indeed act without hindrance. It may be restricted by custom or law, by professional etiquette or trade union regulation, it may be weakened by want of enterprise, or it may be softened by a generous unwillingness to part with old associates. But it never ceases to act, and it permeates all the economic adjustments of the modern world. Thus there are some kinds of fieldwork for which horsepower is clearly more suitable than steam power and vice versa. If we now suppose that there have been no great recent improvements in horse or steam machinery, and that therefore the experience of the past has enabled farmers gradually to apply the law of substitution, then on this supposition the application of steam power will have been pushed just so far that any further use of it in the place of horsepower would bring no net advantage. Their will, however, remain a margin on which they could be indifferently applied, as Jevons would have said, and on that margin the net efficiency of either in adding to the money value of the total product will be proportionate to the cost of applying it. Similarly, if there are two methods of obtaining the same result, one by skilled and the other by unskilled labor, that one will be adopted which is the more efficient in proportion to its cost. There will be a margin on which either will be indifferently applied. On that line the efficiency of each will be in proportion to the price paid for it, account being taken of the special circumstances of different districts and of different workshops in the same district. In other words, the wages of skilled and unskilled labor will bear to one another the same ratio that their efficiencies do at the margin of indifference. Again there will be a rivalry between hand power and machine power, similar to that between two different kinds of hand power or two different kinds of machine power. Thus hand power has the advantage for some operations, as for instance for weeding out valuable crops that have an irregular growth. Horse power in its turn has a clear advantage for weeding an ordinary turnip field, and the application of each of them will be pushed in each district till any further use of it would bring no net advantage there. On the margin of indifference between hand power and horse power their prices must be proportionate to their efficiency, and thus the influence of substitution will tend to establish a direct relation between the wages of labor and the price that has to be paid for horse power. As a rule many kinds of labor, of raw material, of machinery and other plant, and of business organization both internal and external, go to the production of a commodity, and the advantages of economic freedom are never more strikingly manifest than when a business man endowed with genius is trying experiments at his own risk to see whether some new method or combination of old methods will be more efficient than the old. Every businessman indeed, according to his energy and ability, is constantly endeavoring to obtain a notion of the relative efficiency of every agent of production that he employs, as well as of others that might possibly be substituted for some of them. He estimates as best he can how much net product, i.e. net addition to the value of his total product, will be caused by a certain extra use of any one agent, net, i.e., after deducting for any extra expenses that may be indirectly caused by the change, and adding for any incidental savings. He endeavors to employ each agent up to that margin at which its net product would no longer exceed the price he would have to pay for it. He works generally by trained instinct, rather than formal calculation, but his processes are substantially similar to those indicated in our study of derived demand. And from another point of view, they may be described as those which might be reaped by a complex and refined system of bookkeeping by double entry. We have already followed some simple estimates of this sort. We have noticed, for instance, how the proportion of hops and malt in an ale can be varied. How the extra price which can be got for ale by increasing the quantity of hops in it is a representative of the causes which govern the demand price for hops. Assuming that no further trouble or expense of any kind is involved by this additional use of hops, and that the expediency of using this extra amount is doubtful, the extra value thus given to the ale is the marginal net product of the hops of which we are in search. In this case, as in most others, the net product is an improvement in quality or a general contribution to the value of the product. It is not a definite part of the produce which can be separated from the rest, but in exceptional instances that can be done. The notion of the marginal employment of any agent of production implies a possible tendency to diminishing return from its increased employment. Excessive applications of any means to the attainment of any end are indeed sure to yield diminishing returns in every branch of business, and one may say in all the affairs of life. We may take some additional examples of a principle that has already been illustrated. In the manufacture of sewing machines, some parts may well be made of cast iron. For others, a common kind of steel will suffice. There are yet others for which especially expensive steel compound is needed, and all parts should be finished off more or less smoothly so that the machine may work easily. Now, if any one devoted a disproportionate care and expense to the selection of materials for the less important uses, it might truly be said that the expenditure was yielding a rapidly diminishing return, and that he would have done better to give some of it to making his machines work smoothly, or even to producing more machines. And the case might be even worse if he devoted an excessive expenditure to mere brilliancy, a finish, and put a low grade metal to work for which a higher grade was needed. This consideration seems at first to simplify economic problems, but on the contrary, it is a chief source of difficulty and confusion. For though there is some analogy between all these various tendencies to diminishing return, they are yet not identical. Thus the diminishing return which arises from an ill-proportioned application of the various agents of production into a particular task has little in common with that broad tendency to the pressure of a crowded and growing population on the means of subsistence. The great classical law of diminishing return has its chief application not to any one particular crop, but to all the chief food crops. It takes for granted that farmers raise as a rule those crops for which their land and other resources are best adapted, account being taken of the relative demands for the several crops, and that they distribute their resources appropriately between different routes. It does not attribute to them unlimited intelligence and wisdom, but it assumes that, taking one with another, they have shown a reasonable amount of care and discretion in the distribution of these resources. It refers to a country the whole land of which is already in the hands of active businessmen who can supplement their own capital by loans from banks wherever they can show it is likely to be well applied, and asserts that an increase in the total amount of capital applied to agriculture in that country will yield diminishing returns of produce in general. This statement is akin to, but yet quite distinct from, the statement that if any farmer makes a bad distribution of his resources between different plans of cultivation, he will get a markedly diminishing return from those elements of expenditure which he has driven to excess. For instance, in any given case, there is a certain proportion between the amounts which may with best advantage should be spent on plowing and harrowing or manuring. There might be some differences of opinion on the matter, but only within narrow limits. An inexperienced person who plowed many times over land, which was already in fairly good mechanical condition, while he gave it little or none of the manure which it was craving, would be generally condemned as having so over applied plowing as to make it yield a rapidly diminishing return. But this result of the misapplication of resources has no very close connection with the tendency of agriculture in an old country to yield a diminishing return to a general increase of resources well applied in cultivation. And indeed, exactly parallel cases can be found of diminishing return to a particular resource when applied in undue proportion, even in industries which yield an increasing return to increased applications of capital and labor when appropriately distributed. The part played by the net product at the margin of production in the modern doctrine of distribution is apt to be misunderstood. In particular, many able writers have supposed that it represents the marginal use of a thing as governing the value of the whole. It is not so. The doctrine says we must go to the margin to study the action of those forces which govern the value of the whole. And that is a very different affair. Of course, the withdrawal of, say, iron from any of its necessary uses would have just the same influence on its value as its withdrawal from its marginal uses. In the same way as the pressure in a boiler for cooking under high pressure would be affected by the escape of any other steam just as it would be by the escape of the steam in one of the safety valves. But in fact, the steam does not escape except through the safety valves. In like manner, iron or any other agent of production is not under ordinary circumstances thrown out of use except at points at which its use yields no clear surplus of profit. That is, it is thrown out from its marginal uses only. Again, the finger of an automatic weighing machine determines in the sense of indicating the weight sought for. So the escape of steam from a safety valve governed by a spring representing a pressure of 100 pounds to the square inch determines the pressure of steam in the boiler in the sense of indicating that it has reached 100 pounds to the inch. The pressure is caused by the heat. The spring in the valve governs the pressure by yielding and letting out some of the steam when its amount is so great at the existing heat as to overbear the resistance of the spring. Similarly, with regard to machinery and other appliances of production made by man, there is a margin through which additional supplies come in after overcoming the resistance of a spring called cost of production. For when the supply of those appliances is so small relatively to the demand that the earnings expected from new supplies are more than sufficient to yield normal interests, or profits if earnings of management are reckoned in, on their cost to production, besides allowing for depreciation, etc., then the valve opens and the new supplies come in. When the earnings are less than this, the valve remains shut, and as anyhow the existing supply is always in process of slow destruction by use and the lapse of time, the supply is always shrinking when the valve is closed. The valve is that part of the machinery by which the general relations of demand and supply govern value. But marginal uses do not govern value because they, together with value, are themselves governed by those general relations. Thus, so long as the resources of an individual producer are in the form of general purchasing power, he will push every investment up to the margin at which he no longer expects from it a higher net return than he could get by investing in some other material or machine or advertisement, or in the hire of some additional labor. Every investment will, as it were, be driven up to a valve which offers to it resistance equal to its own expanding force. If he invests in material or in labor, that is soon embodied in some saleable product. The sale replenishes his fluid capital, and that, again, is invested up to the margin at which any further investment would yield a return so diminished as not to be profitable. But if he invests in land or in durable building or machine, the return which he gets from his investment may vary widely from his expectation. It will be governed by the market for his products, which may change its character largely through new inventions, changes in fashion, etc., during the life of a machine, to say nothing of the perpetual life of land. The incomes which he thus may derive from investments in land and machinery differ from his individual point of view mainly in the longer life of the land. But in regard to production in general, a dominant difference between the two lies in the fact that the supply of land is fixed, though in a new country the supply of land utilized in man's service may be increased, while the supply of machines may be increased without limit. And this difference reacts on the individual producer. For if no great new invention renders his machine's obsolete, while there is a steady demand for the things made by them, they will be constantly on sale at about their cost of production, and his machines will generally yield him normal profits on that cost of production, with deductions corresponding to their wear and tear. Thus the rate of interest is a ratio, and the two things which it connects are both sums of money. So long as capital is free and the sum of money or general purchasing power over which it gives command is known, the net money income expected to be derived from it can be represented at once as bearing a given ratio, four or five or ten percent to that sum. But when the free capital has been invested in a particular thing, its money value cannot as a rule be ascertained except by capitalizing the net income which it will yield, and therefore the causes which govern it are likely to be akin in a greater or less degree to those which govern rents. We are thus brought to the central doctrine of this part of economics, viz. That which is rightly regarded as interest on free or floating capital or on new inventions of capital is more properly treated as a sort of rent, a quasi-rent on old investments of capital. And there is no sharp line of division between floating capital and that which has been sunk for a special branch of production, nor between new and old investments of capital. Each group shades into the other gradually. And thus even the rent of land is seen not as a thing by itself, but as the leading species of a large genus. Though indeed it has peculiarities of its own which are of vital importance from the point of view of theory as well as of practice. End of chapter eight. Chapter nine of Principles of Economics. Book five. This is a LibriVox recording. All LibriVox recordings are in the public domain. For more information or to volunteer, please visit LibriVox.org. Recording by Beth Ann. Principles of Economics Book five by Alfred Marshall. Chapter nine. Marginal costs in relation to values. General principles continued. The incidents of the tenure of land are so complex, and so many practical issues connected with them have raised controversies on side issues of the problem of value, that it will be well to supplement our previous illustration from land. We may take another from an imaginary commodity so chosen that sharp outlines can be assigned to each stage of the problem. Without inviting the objection that such sharp outlines are not found in the actual relations between landlord and tenant. But before entering on this, we may prepare the way for using as we go illustrations drawn from the incidents of taxation to throw side lights on the problem of value. For indeed, a great part of economic science is occupied with the diffusion throughout the community of economic changes, which primarily affect some particular branch of production or consumption. And there is scarcely any economic principle which cannot be aptly illustrated by discussion of shifting of the effects of some tax forwards, i.e. towards the ultimate consumer, and away from the producer of raw material and implements of production, or else in the opposite direction backwards. But especially is this true of the class of problems now under discussion. It is a general principle that if a tax impinges on anything used by one set of persons in the production of goods or services to be disposed of to other persons, the tax tends to check production. This tends to shift a large part of the burden of the tax forwards on to consumers, and a small part backwards on to those who supply the requirements of this set of producers. Similarly, a tax on the consumption of anything is shifted in a greater or less degree backwards on to its producer. For instance, an unexpected and heavy tax upon printing would strike hard upon those engaged in the trade, for if they attempted to raise prices much, demand would fall off quickly. But the blow would bear unevenly on various classes engaged in the trade. Since printing machines and compositors cannot easily find employment out of the trade, the prices of printing machines and wages of compositors would be kept low for some time. On the other hand, the buildings and seam engines, the porters, engineers and clerks would not wait for their numbers to be adjusted by the slow process of natural decay to the diminished demand. Some of them would be quickly at work in other trades and very little of the burden would stay long on those of them who remained in the trade. A considerable part of the burden, again, would fall on subsidiary industries, such as those engaged in making paper and type, because the market for their products would be curtailed. Authors and publishers would also suffer a little because they would be forced either to raise the price of books with a consequent diminuation of sales or to see a greater portion of their gross receipts swallowed up by cost. Finally, the total turnover of the booksellers would diminish and they would suffer a little. So far it has been assumed that the tax spreads its net very wide and covers every place to which the printing industry in question could be easily transferred. But if the tax were only local, the compositors would migrate beyond its reach and the owners of printing houses might bear a larger and not a smaller proportionate share of the burden than those whose resources were more specialized but more mobile. If the local tax were uncompensated by any effect which tended to attract population, part of the burden would be thrown on local bakers, grocers, etc., whose sales would be diminished. Next suppose that the tax to be leavened on printing presses instead of on printed matter. In that case, if the printers had no semi-opsulate presses which they were inclined to destroy or leave idle, the tax would not strike marginal production. It would not immediately affect the output of printing nor therefore of its price. It would merely intercept some of the earnings of the presses on the way to the owners and lower the quasi-rents of the presses. But it would not affect the rate of net profits which was needed to induce people to invest fluid capital in presses and therefore as the old presses wore out, the tax would add to marginal expenses, that is to expenses which the producer was free to incur or not, as he liked, and which he was in doubt whether to incur. Therefore the supply of printing would be curtailed, its price would rise and new presses would be introduced only up to the margin at which they would be able, in the judgment of printers generally, to pay the tax and yet yield normal profits on the outlay. When this stage had been reached, the distribution of the burden of a tax upon presses would henceforth be nearly the same as that of a tax upon printing, accepting only that there would be more inducement to get a great deal of work out of each press. For instance, more of the presses might be made to work double shifts in spite of the fact that night work involves special expenses. We now pass to apply these principles of shifting taxes to our main illustration. Let us suppose that a meteoric shower of a few thousand large stones harder than diamonds fell all in one place, so that they were all picked up at once and no amount of searching could find any more. These stones able to cut every material would revolutionize many branches of industry and the owners of them would have a differential advantage in production that would afford a large producer's surplus. This surplus would be governed wholly by the urgency and volume of the demand for their services on the one hand and the number of the stones on the other hand. It could not be affected by the cost of obtaining a further supply because none could be had at any price. A cost of production might indeed influence their value indirectly, but it would be the cost of tools made of hard steel and other materials of which the supply can be increased to keep pace with demand. So long as any of the stones were habitually used by intelligent producers for work which could be done equally well by such tools, the value of the stone could not much exceed the cost of producing tools, allowance being made for wear and tear. Equally efficient with it in these inferior use, the stones being so hard as not to be affected by wear would probably be kept in operation during all the working hours of the day. And if their services were very valuable, it might be worthwhile to keep people working over time or even in double or triple shifts in order to extract the utmost service from them. But the more intensively they were applied, the less net return would be reaped from each additional service forced from them, thus illustrating the law that the intensive working not only of land but of every other appliance of production is likely to yield a diminishing return if pressed far enough. The total supply of stones is fixed, but of course any particular manufacturer might obtain almost as many as he liked to pay for, and in the long run he would expect his outlay on them to be returned with interest or profits if the remuneration for his own work were not reckoned separately. Just in the same way as if you were buying machinery, the total stock of which could be increased indefinitely so that its price conformed pretty closely to its cost of production. But when he had once bought the stones, changes in the processes of production or of demand for the things made by their aid might cause the income yielded by them to become twice as great or only half as great as he had expected. In the latter case it would resemble the income derived from a machine which had not the latest improvements and could earn only half as much as a new machine of equal cost. The values of the stone and of the machine alike would be reached by capitalizing the income which they were capable of earning and that income would be governed by the net value of the services rendered by them. The income earning power and therefore the value of each would be independent of its own cost of production but would be governed by the general demand for its production in relation to the general supply of those products. But in the case of the machine that supply would be controlled by the cost of supply of new machines equally efficient with it and in the case of the stone there would be no such limit. So long as all the stones in existence were employed on work that could not be done by anything else. This argument may be put in another way. Since anyone who bought stones would take them from other producers his purchase would not materially affect the general relations of demand for the service of the stones to the supply of those services. It would not therefore affect the price of the stones which would still be the capitalized value of the services which they rendered in those uses in which the need for them was the least urgent. And to say that the purchaser expected normal interest on the price which represented the capitalized value of the services would be a circular statement that the value of the services rendered by stones is governed by the value of those very surfaces. Such circular reasoning are sometimes nearly harmless but they always tend to overlay and hide the real issues and they are sometimes applied to illegitimate uses by company promoters and by advocates of special interests who desire to influence the course of legislation in their own favor. For instance a semi-monopolistic business aggregation or trust is often overcapitalized. To effect this a time is chosen at which the branch of production with which it is concerned is abnormally prosperous. When perhaps some solid firms are ending 50% net on their capital in a single year and thus making up for lean years past and to come in which their receipts will do little more than cover prime costs. financiers connected with the flotation sometimes even arranged that the businesses to be offered to the public shall have a good many orders to fill especially favorable prices. The loss falling on themselves or on other companies which they control. The gains to be secured by semi-monopolistic selling and possibly by some further economies in production are emphasized and the stock of the trust is absorbed by the public. If ultimately objection to the conduct of the trust is raised and especially to the strengthening of its semi-monopolistic position by a tariff or any other public favor the answer is given that the shareholders are receiving but a moderate return on their investments. Such cases are not uncommon in America. In this country a more moderate watering in the stock of some railways has been occasionally used indirectly as a defense of the shareholders against the lowering of rates that threatens to reduce dividends on inflated capital below what would be a fair return on solid capital. Next let us suppose that the stones were not all found at once but were scattered over the surface of the earth on public ground and that a laborious search might expect to be rewarded by finding one here and there. Then people would hunt for the stones only up to that point or margin at which the probable gain of doing so would in the long run just reward the outline of labor and capital involved and in the long run the normal value of the stones would be such as to maintain equilibrium between demand and supply. The number of the stones gathered annually being in the long run just that for which the normal demand price was equal to the normal supply price. Finally let us bring the case of the stones into accord with that of the lighter machinery and other plant ordinarily used in manufacture by supposing that the stones were brittle and would soon be destroyed and that an exhaustible store existed from which additional supplies could be obtained quickly and certainly at a nearly uniform cost. In this case the value of the stone would always correspond closely to that cost. Variations in demand would have but little influence on their price because even the slight change in price would quickly affect a great change in the stock of them in the market. In this case the income derived from a stone allowance being made for wear and tear would always adhere closely to interest on its cost of production. This series of hypotheses stretches continuously from the one extreme in which the income derived from the stones is a rent in the strictest sense of the term to the other extreme in which it is to be classed whether with interest on free or floating capital. In the first extreme case the stones cannot be worn out or destroyed and no more can be found. The course tend to be distributed among the various users to which they are applicable in such a way that there is no use to which an increased supply of them could be applied without taking them away from some other use in which they are rendering net services at least as valuable. These margins of application of the several uses are thus governed by the relation in which the fixed stock of stones stands to aggregate demands for them in different uses. And the margins being thus governed the prices that will be paid for their use are indicated by the value of the services which they render at any one of those margins. A uniform tax on them collected from the user will lower their net service in each use by the same amount. It will not affect their distribution between several uses and it will fall wholly on the owner after perhaps some little delay caused by frictional resistance to adjustments. At the opposite extreme of our chain of hypotheses the stones perish so quickly and are so quickly reproduced at about a uniform cost that variations in the urgency and volume of the uses to which the stones can be put will be followed so promptly by changes in the stock of them available that those services can never yield much more or much less than normal interest on the money of cost of obtaining additional stones. In this case a businessman when making his estimates for the cost of any undertaking in which stones will be used may enter interest or if he is counting his own work in profits for the time during which those stones will be used together with wear and tear as part of the prime special or direct expenses of his undertaking. Attacks on the stones under these conditions would fall entirely on anyone who even a little while after the tax had come into force gave out a contract for anything in making which the stones would be used. Taking an intermediate hypotheses as to the length of life of the stones and the rapidity with which new supplies could be obtained we find that the changes which the borrower of stones must expect to pay and the revenue which the owner of the stones could reckon on deriving from them at any time might temporarily diverge some away from interest or profits on their cost. For changes in the urgency and volume of the uses to which they could be applied might have caused the value of the services rendered by them in their marginal uses to rise or fall a great deal even though there has been no considerable change in the difficulty of attaining them and if this rise or fall arising from variations in demand and not from variations in the cost of the stones is likely to be great during the period of any particular enterprise or any particular problem of value that is under discussion then for that discussion the income yielded by the stones is to be regarded as more nearly akin to a rent than to interest on the cost of producing the stones. Attacks upon the stones in such a case would tend to diminish the rental which people would pay for their use and therefore to diminish the inducements toward investing capital and effort in obtaining additional supplies it would therefore check the supply and compel those who needed the stones to pay gradually increasing rentals for their use up to the point at which the rentals fully covered the cost of producing the stones but the time needed for this readjustment might be long and in the interval a great part of the tax would fall upon the owners of the stones if the life of the stones was long relatively to that process of production in which the stones were used which was under discussion the stock of stones might be in excess of that needed to do all the work for which they were specially fitted some of them might be lying almost idle and the owner of these stones might make up his estimate of the marginal price for which he was just willing to work without entering in that estimate interest on the value of the stones that is to say some cost which would have been classed as prime costs in relation to contracts or other affairs which lasted over a long period would be classed as supplementary cost in relation to a particular affair which would last but a short time and which came under consideration when business was slack it is of course just as essential in the long run that the price obtained should cover general or supplementary cost as that it should cover prime costs an industry will be driven out of existence in the long run as certainly by failing to return even a moderate interest on capital from day to day just as a man's work will be stopped as certainly by depriving him of food as by putting him in chains but the man can go on working fairly well for a day without food while if he is put in change the check and his work comes at once so an industry may and often does keep tolerably active during the whole year or even more in which very little is earned beyond prime costs the fixed plant has to work for nothing but when the price falls so low that it does not pay for the out-of-pocket expenses during the year for wages and raw material for coal and for lighting etc then the production is likely to come to a sharp stop this is the fundamental difference between those incomes yielded by agents of production which are to be regarded as rents or quasi rents and those which after allowing for the replacement of wear and tear and other destruction may be regarded as interest more profits on current investments the difference is fundamental but it is only of one degree biology tends to show that the animal and vegetable kingdoms have a common origin but yet there are fundamental differences between mammals and trees while in a narrower sense the differences between an oak and an apple tree are fundamental and so are in a still narrower sense those between an apple tree and a rose bush though they are both classed as rosacea thus our central doctrine is that interest on free capital and quasi rent on an old investment of capital shade into one another gradually even the rent of land not being a thing by itself but the leading species of a large genus again pure elements are seldom isolated from all others by nature either in the physical or moral world pure rent in the strict sense of the term is scarcely ever met with nearly all income from land contains more or less important elements which are derived from efforts invested in building houses and sheds in draining the land and so on but economists have learned to recognize the diversity of nature in those composite things to which the names of rent profits wages etc aren't given in popular language they have learned that there is an element of true rent in the composite product that is commonly called wages an element of true earnings in what is commonly called rent and so on they have learned in short to follow the example of the chemist who seeks for the true properties of each element and who is thus prepared to deal with common oxigena or soda of commerce though containing a mixtures of other elements professor fetter seems to ignore this lesson in an article on the passing of the concept of rent in the quarterly journal of economics may 1901 page 419 where he argues that if only those things which own nothing to labor are classed as land and if it is then shown that there is no material thing in settled countries of which this can be said it follows that everything must be classed as capital again he appears to have missed the true import of the doctrines which he has sells when he argues against extension as the fundamental attribute of land and the basis of rent the fact is that its extension or rather the aggregate of its space relation is the chief though not the only property of land which causes the income derived from it in an old country to contain a large amount of true rent and that the element of true rent which exists in the income derived from land or the rent of land in the popular use of the term is in practice so much more important than any others that it has given a special character to the historical development of the theory of rent if meteoric stones of absolute hardness and high demand and incapable of increase had played a more important part in the economic history of the world than land then the elements of true rent which attracted the chief attention of students would have been associated with the property of hardness and this would have given a special tone and character to development of the theory of rent but neither extension nor hardness is a fundamental attribute of all things which yield a true rent professor fetter seems also to have missed the point of the central doctrine as to rents quasi rents and interest given above they recognize that nearly all land and actual use contains an element of capital that separate reasonings are required for those parts of its value which are and those which are not due to the efforts of man invested in the land for purposes of production and that the results of these reasonings must be combined in dealing with any particular case of that income which commonly goes by the name rent but not all of which is rent in the narrower sense of the term the manner in which the reasonings are to be combined depends on the nature of the problem sometimes the mere mechanical composition of forces suffices more often allowances must be made for a quasi chemical interaction of the various forces while in nearly all problems of large scope and importance regard must be had to biological conceptions of growth finally a little may be said on a distinction that is sometimes made between scarcity rents and differential rents in a sense all rents are scarcity rents and all rents are differential rents but in some cases it is convenient to estimate the rent of a particular agent by comparing its yield to that of an inferior perhaps a marginal agent when similarly worked with appropriate appliances and in other cases it is best to go straight to the fundamental relations of demand to the scarcity or abundance of the means for the production of those commodities for making which the agent is serviceable suppose for instance that all the meteoric stones in existence were equally hard and imperishable and that they were in the hands of a single authority further that this authority decided not to make use of its monopolistic power to restrict reduction so as to raise the price of its services artificially but to work each of the stones to the full extent it could be profitably worked that is up to the margin of pressure so intensive that the resulting product could barely be marketed at a price which covered with profits its expenses without allowing anything for the use of the stone then the price of the services rendered by the stones would have been governed by the natural scarcity of the aggregate output of their services in relation to the demand for those services and the aggregate surplus or rent would most easily be reckoned as the excess of the scarcity price over the aggregate expense of working the stones it would therefore generally be regarded as a scarcity rent but on the other hand it could have been reckoned as the differential excess of the aggregate value of the net services of the stones over that which would have been reached if all their uses had been as unproductive as their marginal uses and exactly the same would be true if the stones were in the hands of different producers impelled by competition with one another to work each stone up to the margin at which its further use ceased to be profitable this last instance has been so chosen as to bring out the fact that the differential as well as the scarcity routes for estimating rent are so independent of the existence of inferior agents of production for the differential comparison in favor of the more advantageous uses of the stones can be made by reference to the marginal uses of good stones as clearly as by reference to the use of inferior stones which are on the margin of not being worth using at all in this connection it may be noted that the opinion that the existence of inferior land or other agents of production tends to raise the rents of the better agents is not merely untrue it is reverse of the truth for if the bad land were to be flooded and rendered incapable of producing anything at all the cultivation of other land would need to be more intensive and therefore the price of the product would be higher and rents generally would be higher then if the land had not been a poor contributor to the total stock of produce compare kassel das recht oft im bollen arbeitz getrag the many misconceptions that have appeared in the writings even of able economists as to the nature of a quasi rent seem to arise from an inadequate attention to the differences between short periods and long in regard to value and cost thus it has been said that a quasi rent is an unnecessary profit and that it is no part of cost quasi rent is correctly described as an unnecessary profit in regard to short periods because no special or prime costs have to be incurred for the production of a machine that by hypothesis is already made in waiting for its work but it is a necessary profit in regard to those other supplementary costs which must be incurred in the long run in addition to prime costs and which in some industries as for instance submarine telegraphy are very much more important than prime cost it is no part of costs under any conditions but the confident expectation of coming quasi rents is a necessary condition for the investment of capital and machinery and for the incurring of supplementary costs generally again a quasi rent has been described as a sort of conjecture or opportunity profit and almost in the same breath as no profit or interest at all but only a rent for the time being it is a conjecture or opportunity income while in the long run it is expected to and it generally does yield a normal rate of interest or if earnings of management are counted in of profit on the free capital represented by a definite sum of money that was invested in producing it by definition the rate of interest is a percentage that is a relation between two numbers see above page 412 a machine is not a number its value may be a certain number of pounds or dollars but that value is estimated unless the machine be a new one its aggregate of its discounted earnings or quasi rents if the machine is new its makers have calculated that this aggregate will appear to probable purchasers as the equivalent of a price which will repay the makers for it in that case therefore it is as a rule both a cost price and a price which represents an aggregate of discounted future incomes but when the machine is old and partially obsolete in pattern there is no close relation between its value and its cost of production its value is then simply the aggregate of the discounted value of the future quasi rents which it is expected to earn end of chapter 9 chapter 10 of principles of economics book 5 this is a LibriVox recording all LibriVox recordings are in the public domain for more information or to volunteer please visit LibriVox.org recording by Beth Ann principles of economics book 5 by Alfred Marshall chapter 10 marginal costs in relation to agricultural values we now pass from general considerations to those relating to land and we begin with those specially applicable to agricultural land in an old country suppose that a war which was not expected to last long were to cut off part of the food supplies of England Englishmen would set themselves to raise heavier crops by such extra application of capital or labor as was likely to yield a speedy return they would consider the results of artificial manures of the use of cloud crushing machines and so on and the more favorable these results were the less would be the rise in the price of produce in the coming year which they regarded as necessary to make it worth their while to incur additional outweigh in these directions but the war would have very little effect on their action as to those improvements which would not bear fruit till it was over in any inquiry then as to the causes that will determine the prices of corn during a short period that fertility which the soil derives from slowly made improvements has to be taken for granted as it then is almost in the same way as if it had been made by nature thus the income derived from these permanent improvements gives a surplus above the prime or special cost needed for raising extra produce but it is not a true surplus in the same sense that rent proper is i.e. it is not a surplus above the total cost of the produce it is needed to cover the general expenses of the business to speak more exactly if the income derived from improvements that have been made in the land by its individual owner is so reckoned as not to include any benefit which would have been conferred on the land by the general progress of society independently of his efforts and sacrifices then as a rule the whole of it is required to enumerate him for those efforts and sacrifices he may have underestimated the gains which will result from them but he is about equally likely to have made an overestimate if he has estimated them rightly his interest has urged him to make the investment as soon as it shows signs of being profitable and in the absence of any special reason to the contrary we may suppose him to have done this in the long run then the net returns to the investment of capital in the land taking successful and unsuccessful returns together do not afford more than an adequate motive to such investment if poor returns had been expected than those on which people actually based their calculations fewer improvements would have been made that is to say for periods which are long in comparison with the time needed to make improvements of any kind and bring them into full operation the net incomes derived from them are but the price required to be paid for the efforts and sacrifices of those who make them the expense of making them thus directly enter into marginal expenses of production and take a direct part in governing long period supply price but in short periods that is in periods short relatively to the time required to make and bring into full bearing improvements of the class in question no such direct influence on supply price is exercised but the necessity that such improvements should in the long run yield net incomes sufficient to give normal profits on their cost and therefore when we are dealing with such periods these incomes may be regarded as quasi-rents which depend on the price of the produce of course the character and extent of the improvements depends partly on the conditions of land tenure and the enterprise inability and command over capital on the part of landlords and tenants which existed at the time and place in question in this connection we shall find when we come to study land tenure that there are large allowances to be made for the special conditions of different places it may be noted however that rent proper is estimated on understanding that the original properties of the soil are unimpaired and when the income derived from the improvements is regarded as a quasi-rent it is to be understood that they are kept up in full efficiency if they are being deteriorated the equivalent of the injury done to them must be deducted from the income they are made to yield before we can arrive at the net income which is to be regarded as their quasi-rent that part of the income which is required to cover wear and tear bears some resemblance to a royalty which does no more than cover the injury done to a mine by taking ore out of it we may conclude then one the amount of produce raised and therefore the position of the margin of cultivation i.e the margin of the profitable application of capital and labor to good and bad land alike are both governed by the general conditions of demand and supply they are governed on the one hand by demand that is by the numbers of the population who consume the produce the intensity of their need for it and their means of paying for it and on the other hand by supply that is by the extent and fertility of the available land and the numbers and resources of those ready to cultivate it thus cost of production eagerness of demand margin of production and price of the produce mutually govern one another and no circular reasoning is involved in speaking of any one as in part governed by the others two that part of the produce which goes as rent is of course thrown on the market and acts on prices in just the same way as any other part but the general conditions of demand and supply for their relations to one another are not affected by the division of the produce into the share of rent and the share needed to render the farmers expenditure profitable the amount of that rent is not a governing cause but is itself governed by the fertility of land the price of the produce and the position of the margin it is the excess of the value of the total returns which capital and labor applied to land to obtain over those which they would have obtained under circumstances as unfavorable as those on the margin of cultivation three if the cost of production were estimated for parts of the produce which do not come from the margin a charge on account of rent would of course need to be entered in this estimate and if this estimate were used in an account of the causes which govern the price of the produce then the reasoning would be circular that which is wholly uneffect would be reckoned up as part of the cause of those things of which it is uneffect four the cost of production of the marginal produce can be ascertained without reasoning in the circle the cost of production of other parts of the produce cannot the cost of production on the margin of the profitable application of capital and labor is that to which the price of the whole produce tends under the control of the general conditions of demand and supply it does not govern price but it focuses the causes which do govern price it has sometimes been suggested that if all land were equally advantageous and all were occupied the income derived from it would partake of the nature from monopoly rent but this seems to be an error of course the landowners might conceivably combine to stint production whether their properties were of equal fertility or not the raised prices which would be thus obtained for the produce would be monopoly prices and the incomes of the owners would be monopoly revenues rather than rents but with a free market the revenues from land would be rents governed by the same causes and in the same way in a country where the land was all of equal advantage as in those where good and bad land were intermingled it is indeed true that if there were more than enough land all of about the same fertility to enable everyone to have as much of it as was needed to give full scope to the capital he was prepared to apply to it then it could yield no rent but that merely illustrates the old paradox that water when abundant has no market value for though the services of some part of it are essential to support life yet everyone can get without effort to that margin of satiety at which any further supplies would be of no service to him when every cottager has a well from which he can draw as much water as he needs with no more labor than is required at his neighbor's well the water in the well has no market value but let a drought set in so that the shallow wells are exhausted and even the deeper wells are threatened then the owners of those wells can extract a charge for every bucket which they allow anyone to draw for his own youth the denser a population becomes the more numerous will be the occasions on which such charges can be made it being supposed that no new wells are developed and at last every owner of a well may find in it a permanent source of revenue in the same way the scarcity value of land in a new country gradually emerges the early settler exercises no exclusive privilege for he only does what anyone else is at a liberty to do he undergoes many hardships if not personal dangers and perhaps he runs some risk that the land may turn out badly and that he may have to abandon his improvements on the other hand his venture may turn out well the flow of population may tend his way and the value of his land may soon give as large a surplus over the normal renumeration of his outlay on it as the fisherman's hall does when they come home with their boat full but in this there is no surplus above the rewards needed for his venture he has engaged in a risky business which was open to all and his energy and good fortune have given him an exceptionally high reward anyone else might have taken the same chance as he did thus the income which he expects the land to afford in the future enters into the calculations of the settler and adds to the motives which determine his action when in doubt as to how far to carry his enterprise he regards its discounted value as profits on his capital and as earnings of his own labor insofar as his improvements are made with his own hands a settler often takes up land with the expectation that the produce which it affords while in his possession will fall short of an adequate reward for his hardships his labor and his expenditure he looks for part of his reward in the value of the land itself which he may perhaps after a while sell to some newcomer who has no turn for the life of a pioneer sometimes even as the british farmer learns to his cost the new settler regards his wheat almost as a by-product the main product for which he works is a farm the title deeds to which he will earn by improving the land he reckons that its value will steadily rise not through his own efforts so much as through the growth of those comforts and resources and of those markets in which to buy and in which to sell that are the product of the growing public prosperity this may be put in another way people are generally unwilling to face the hardships and isolation of pioneer agriculture unless they can look forward with some confidence to much higher earnings measured in terms of the necessaries of life then they could get at home minors cannot be attracted to a rich mine isolated from other conveniences and varied social opportunities of civilization except by the promise of high wages and those who super intend the investment of their own capital in such mines expect very high profits for similar reasons pioneer farmers require high aggregate gains made up of receipts for the sell of their produce together with the acquisition of valuable title deeds to enumerate them for their labor and endurance of hardships and the land is peopled up to that margin at which it just yields gains adequate for this purpose without leaving any surplus for rent when no charge is made up for the land when a charge is made immigration spreads up only to that margin at which the gains will leave a surplus of the nature of rent to cover such charges in addition to rewarding the pioneers endurance with all this it is to be remembered that land is but a particular form of capital from the point of view of the individual producer the question whether a farmer has carried his cultivation of a particular piece of land as far as he profitably can and whether he should try to force more from it or to take in another piece of land is of the same kind as the question whether he should buy a new plow or try to get a little more work out of his present stock of plows using them sometimes when the soil is not in a very favorable condition and feeding his horses a little more lavishly he weighs the net product of a little more land against the other uses to which he could put the capital sum that he would have to expend in order to obtain it and in like manner he weighs the net product to be got by working his plows under unfavorable circumstances against that got by increasing his stock of plows and thus working under more favorable conditions that part of his produce which he is in doubt whether to raise by extra use of his existing plows or by introducing a new plow may be said to be derived from a marginal use of the plow it pays nothing net i.e. nothing beyond a charge for actual wear and tear towards the net income earned by the plow so again a manufacturer or trader owning both land and buildings regards the two as bearing similar relations to his business either will afford him aid and accommodation at first liberally and afterwards with diminishing return as he endeavors to force more and more from them till at last he will doubt whether the overcrowding of his workshops or historians is not so great a source of trouble that it would answer his purpose to obtain more space and when he comes to decide whether to obtain that space by taking in an extra piece of land or by building his factory a floor higher he weighs the net income to be derived from further investments in the one against that to be derived from the other that part of his production which he just forces out of his existing appliances being in doubt whether it would not be better worth his while to increase those appliances than to work so intensely those which he has does not contribute to the net income which those appliances yield him this argument says nothing as to whether the appliances were made by man or part of a stock given by nature it applies to rents and quasi-rents alike but there is this difference from the point of view of society if one person has possession of a farm there is less land for others to have his use of it is not in addition to but in lieu of the use of a farm by other people whereas if he invests in improvements of land or in buildings on it he will not appreciably could tell the opportunities of others to invest capital in like improvements thus there is likeness amid unlikeness between land and appliances made by man there is unlikeness because land in an old country is approximately and in some senses absolutely a permanent and fixed stock while appliances made by man whether improvements in land or in buildings or machinery etc are a flow capable of being increased or diminished according to variations in the effective demand for the products which they help in raising so far there is unlikeness but on the other hand there is likeness in that sense some of them cannot be produced quickly they are a practically fixed stock for short periods and for those periods incomes derived from them stand in the same relation to the value of the products raised by them as do true rents the relations between rent and profits engaged the attention of the economists of the last generation among whom may be specially mentioned senior and mill hermit and mangle senior seemed almost on the point of perceiving that the key of the difficulty was held by the element of time but here is elsewhere he contented himself with suggestions he did not work them out he says political economy page 129 for all useful purposes the distinction of profits from rent ceases as soon as the capital from which a given revenue arises has become whether by gift or by inheritance the property of a person to whose abstinence and exertion it did not owe its creation again mill says political economy book three any difference in favor of certain producers or in favor of production in certain circumstances is the source of a gain which though not called rent unless paid periodically by one person to another is governed by laws entirely the same with it it has been well observed that a speculator who without manipulating prices by false intelligence or otherwise anticipates the future correctly and who makes his gains by shrewd purchases and sells on the stock exchange or in produce markets generally renders a public service by pushing forward production where it is wanted and repressing it where it is not but that a speculator in land in an old country can render no such public service because the stock of land is fixed at the best he can prevent a site with great possibilities from being devoted to inferior uses in consequence of the haste ignorance or impacuniosity of those in control of it let us apply these considerations to the supposition that a permanent tax is to be levied on corn in the sense in which it was used by the classical economist as short for all agricultural produce it is obvious that the farmer would try to make the consumer pay some part at least of the tax but any rise in the price is charged to the consumer with check demand and thus react on the farmer in order to decide how much of this tax would be shifted on to the consumer we must study the margin of profitable expenditure whether that be the margin of a little expenditure applied to poor land and land far removed from good markets or the margin of a land expenditure applied to rich land and land near dense industrial districts if only a little corn had been raised near the margin a moderate fault in the net price received by the farmer would not cause a great check to the supply of corn there would therefore be no great rise in the price paid for it by the consumer and the consumer would bear very little of the tax but the surplus value of the corn over its expenses of production would fall considerably the farmer if cultivating his own land would bear the greater part of the tax and if he were renting a land he could demand a great reduction of his rent if on the other hand a great deal of corn had been raised near the margin of cultivation the tax would tend to cause a great shrinkage of production the consequent rise of price would arrest that shrinkage leaving the farmer in a position to cultivate nearly as intensely as before and the landlord's rent would suffer but little thus on the one hand a tax which is so levied as to discourage the cultivation of land or the erection of farm buildings on it tends to be shifted forward on to the consumers of the produce of land but on the other hand a tax on that part of the annual value of land which arises from its position its extension its yearly income of sunlight and heat and rain and air cannot settle anywhere except on the landlord a lessee being of course landlord for the time this annual value of the land is commonly called its original value or its inherent value but much of that value is the result of the action of men though not of its individual holders for instance barren heat land may suddenly acquire high value from the growth of an industrial population near it though its owners have left it untouched as it was made by nature it is therefore perhaps more correct to call this part of the annual value of land its public value while that part which can be traced to the work and outlay of its individual holders may be called its private value the old terms inherent value and original value may however be retained for general use with a note of caution as to their partial inaccuracy and using another term that has precedent in its favor we may speak of this annual public value of the land as true rent a tax on the public value of land does not greatly diminish the inducements to cultivate land highly nor to erect farm buildings on it such a tax therefore does not greatly diminish the supply of agricultural produce offered on the market nor raise the price of produce and it is not therefore shifted away from the owners of land this assumes that the true rent of land on which the tax is levied is assessed with reference to its general capabilities and not to the special use which the owner makes of it its net product is supposed to be that which could be got by a cultivator of normal ability and enterprise turning it to good account to the best of its judgment if an improved method of cultivation develops latent resources of the soil so as to yield an increased return much in excess of what is required to enumerate the outlay with a good rate of profits this excess of net return above the normal profits belongs properly to true rent and yet if it is known or even expected that a very heavy special tax on true rent will be made to apply to this excess income that expectation may deter the owner from making the improvement the exemption of vacant building land from taxes on its full value retards building see appendix g a little has been said incidentally of the competition between different branches of industry for the same raw material or appliances for production but now we have to consider the competition between various branches of agriculture for the same land this case is simpler than that of urban land because farming is a single business so far as the main crops are concerned though the rearing of choice trees including vines flowers vegetables etc affords scope for various kinds of specialized business ability the classical economists were therefore justified in provisionally supposing that all kinds of agricultural produce can be regarded as equivalent to certain quantities of corn and that all the land will be used for agricultural purposes with the exception of building sites which are a small and nearly fixed part of the whole but when we concentrate our attention on any one product as for instance hops it may seem that a new principle is introduced that is however not the case let us look into this hops are grown in varying rotations with other crops and the farmers often in doubt whether he shall grow hops or something else in one of his fields thus each crop strives against others for the possession of the land and if anyone crop shows signs of being more renumerative than before relatively to the others the cultivators will devote more of their land and resources to it the change may be retarded by habit or diffidence or obscenity or limitations on the cultivator's knowledge or by the terms of his lease but it will still be true in the main that each cultivator to recall once more the dominant principles of substitution taking account of his own means will push the investment of capital in his business in each several direction until what appears in his judgment to be the margin of profitableness is reached that is until there seems to him no good reason for thinking that the gains resulting from any further investment in that particular direction would compensate him for his outlay thus in equilibrium oats and hops and every other crop will yield the same net return to that outlay of capital and labor which the cultivators only just induced to apply for otherwise he would have miscalculated he would have failed to get the maximum reward which his outlay can be made to yield and it would still be open to him to increase his gains by redistributing his crops by increasing or diminishing his cultivation of oats or some other crop in so far as the farmer is producing raw material or even human food for market his distribution of resources between different uses is a problem of business economy in so far as he is producing for his own domestic consumption it is in part at least a problem of domestic economy it may be added that note 14 in the mathematical appendix emphasizes the fact that that distribution of outlay between different enterprises which will give a maximum aggregate turn is fixed for the same set of equations as that for the similar problem of domestic economy mill principles book three when discussing joint products observed that all questions relating to the competition of crops for the possession of particular soils are complicated by the rotation of crops in similar causes an intricate debit and credit account by double entry needs to be kept between the various members of the rotation practice and shrewd instinct enable the farmer to do this fairly well the whole problem might be expressed in simple mathematical phrases but they would be tedious and perhaps unfruitful they would therefore not be serviceable so long as they remained abstract though they belong to a class which may ultimately be of good use in the higher science of agriculture when that has advanced far enough to fill in realistic details this brings us to consider taxation in reference to the competition of different crops for the use of the same land let us suppose that a tax is imposed on hops wherever grown it is not to be a mere local rate or tax the farmer can evade a part of the pressure of the tax by lessening the intensity of his cultivation of the land which he plants with hops and a yet further part by substituting another crop on land which he had proposed to devote to hops he will have recourse to the second plant insofar as he considers that he would get a better result by growing another crop and selling it free from the tax then by growing hops and selling them in spite of the tax in this case the surplus which he could obtain from the land by growing say oats upon it would come into his mind when deciding where to set the limit to his production of hops but even here there would be no simple numerical relation between the surplus or rent which the land would yield under oats and the marginal costs which the price of hops must cover and a farmer whose land produced hops of exceptionally high quality and which happened to be in good condition at the time for hops would have no doubt at all that it was best to grow hops in the land though in consequence of the tax he might decide to curtail a little his expenditure on it if for instance he reckoned that he could get a surplus of 30 pounds above his expenses other than rent in spite of the tax by growing hops and a surplus of only 20 pounds above similar expenses by growing any other crop it could not be truly sad that the rent which fulfilled could be made to yield by growing other crops entered into the marginal price of oats but it is easier to interpret the classical doctrine that rent does not enter into cost of production in a sense in which it is not true and to scoff at it then in the sense in which it was intended and is true it seems best therefore to avoid the phrase the ordinary man is offended by the odd phrase that rent does not enter into the price of oats when he sees that an increase in the demand for land for other uses manifests itself in a rise of the rental value of all land in the neighborhood leaves less land free for growing oats consequently makes it worthwhile to force larger crops of oats out of the remaining oat land and thus raises the marginal expenses of oats and their price a rise in rent does serve as a medium through which the growing scarcity of land available for hops and other produce uptrudes itself on his notice and it is not worthwhile to try to force him to go behind these symptoms of the change in conditions to the truly operative causes it is therefore inexperient to say that rent of land does not enter into their price but it is worse than inexperient to say that the rent of the land does enter into their price that is false jevens asks preference to theory of political economy if land which has been yielding two pounds per acre rent as pasture be plowed up and used for raising wheat must not the two pound per acre be debited against the expenses of production of wheat the answer is in the negative for there is no connection between this particular sum of two pounds and the expenses of production of that wheat which only just pays its way what should be said is when land capable of being used for producing one commodity is used for producing another the price of the first is raised by the consequent limitation of its field of production the price of the second will be the expenses of production wages and profits of that part of it which only just pays its way that which is produced on the margin of profitable expenditure and if for the purposes of any particular argument we take together the whole expenses of the production on that land and divide these among the whole of the commodity produced then the rent which we ought to count in is not that which the land would pay if used for producing the first commodity but that which it does pay when used for producing the second meanwhile the tendency towards a general restriction in the supply of hops would tend to raise their price if the demand for them were very rigid and hops of adequate quality could not easily be imported from beyond the range of this special tax the price might rise by nearly the full amount of the tax in that case the tendency would be checked and very nearly as much hops would be grown as before the tax had been levied and here as in the case of a tax on printing recently discussed the effect of a local tax is in strong contrast to that of a general tax for unless the local tax covered most of the ground in the country on which good hops could be grown its effect would be to drive them beyond its boundary very little revenue would be got from it local farmers would suffer a good deal and the public would pay a rather higher price for their hops the argument of the last section applies so far as short periods are concerned to the earning power of farm buildings and to other quasi-rants in existing farm buildings or other appliances which could be used in producing one commodity are diverted to producing another because the demand for that is such as to enable them to earn a higher income by producing it then for the time the supply of the first will be less and its price higher than if the appliances had not been able to earn a higher income by other use thus when appliances are capable of being used in more than one branch of agriculture the marginal cost in each branch will be affected by the extent to which these appliances are called off for work in other branches other agents of production will be pushed to more intensive uses in the first branch in spite of a diminishing return and the value of its product will rise because only at a higher value will the price be in equilibrium the increased earning power of the appliances due to the eternal demand will appear to be the cause of this increased value the increased earning power of the appliances due to the external demand will appear to be the cause of this increase in value for it will cause a relative scarcity of the appliances in the branch of production for it will cause a relative scarcity of the appliances in that branch of production and therefore rise in marginal cost and therefore raise marginal costs and from this statement it appears superficially to be a simple transition to the statement that the increased earning power of the appliances enter into those costs which govern value but the transition is illegitimate there will be no direct or numerical relation between the increase in the price of the first commodity and the income that the appliances can earn when they have been transferred to the second industry and adapted for service in it similarly if a tax be put on factories used in one industry some of them will be diverted to other industries and consequently the marginal costs and therefore the values of the products in those industries will fall simultaneously with the temporary fall and net rental values of factories in all uses but these falls will vary in amount and there will be no numerical relation between the fall and the prices of the product and in these rents or rather quasi rents these principles are not applicable to mines whether for short periods or for long our royalty is not a rent though often so called for except when mines quarries etc are practically inexhaustible the excess of their income over their direct out going tax to be regarded in part at least as the price got by the sell of stored up goods stored up by nature indeed but now treated as private property and therefore the marginal supply price of minerals includes a royalty in addition to the marginal expenses of working the mine of course the owner desires to receive the royalty without undue delay and the contract between him and the leasee often provides partly for this reason for the payment of a rent as well as a royalty but the royalty itself on a ton of coal when accurately adjusted represents that diminution in the value of the mine regarded as a source of wealth in the future which is caused by taking the ton out of nature's storehouse Adam Smith is attacked by Ricardo for putting rent on the same footing with wages and profits as parts of money cost of production and no doubt he does this sometimes but yet he says elsewhere rent it is to be observed enters into the composition of the price of commodities in a different way from wages and profits high or low wages and profits are the cause of high or low price higher low rent is the effect of it it is because higher low wages and profit must be paid in order to bring a particular commodity to market that its price is high or low but it is because its price is high or low a great deal more or very little more or no more than what is sufficient to pay those wages and profits that it affords a high rent or low rent or no rented all wealth of nations in this as in many other instances he anticipated in one part of his writing truth which in other parts he has seemed to deny Adam Smith discusses the price at which coals can be sold for any considerable time and contends that the most fertile mine regulates the price of coals at all other mines in the neighborhood his meaning is not clear but he does not appear to be referring to any temporary underselling and he seems to imply that the mines are leased at so much a year Ricardo following on apparently the same lines comes to the opposite conclusion that it is the least fertile mine which regulates price which is perhaps nearer the truth than Adam Smith's doctrine but in fact when the charge for the use of a mine is mainly in the form of a royalty neither proposition seems to be applicable Ricardo was technically right or at all events was not definitely wrong when he said that rent does not enter into the marginal cost of production of mineral produce but he ought to have added that if a mine is not practically inexhaustible the income derived from it is partially rent and partially royalty and that though the rent does not the minimum royalty does enter directly into the expenses incurred on behalf of every part of the produce whether marginal or not the royalty is of course calculated in regard to those seams in the mine which are neither exceptionally rich and easy working nor exceptionally poor and difficult some seams barely pay the expense of working them and some which run short or have a bad fault do not even nearly pay the wages of the labor spent on them the whole argument however implicitly assumes the conditions of an old country professor tossig is probably right when having in view of the circumstances of a new country principles too he doubts whether any payment at all can be secured by the owner of the very poorest mine assuming he has done nothing to develop it end of chapter 10